Conference Call, 05/20/97 Williams-Sonoma Q1 '97

FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF Debit)

Williams-Sonoma, Inc.
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3250 Van Ness Avenue
San Francisco, CA 94109
(415) 421-7900

UNION CITY, CA (May 20, 1997)/FOOLWIRE/ --- Williams-Sonoma, Inc. released first quarter 1997 results this morning. They were pleased to report a first quarter profit of $0.05 per share which beat analyst estimates by $0.05. They have a goal of being profitable every quarter and they are happy to have achieved this goal in the first quarter.

SALES/COMP RESULTS. As they said in the last call, their sales plans for the first quarter were conservative, especially given the 7.5% comps they had last year and a 25% increase in catalog sales when they were clearing excess inventories. They are pleased to report first quarter comps essentially flat to last year and their catalog sales were up about 6%. Looking ahead, their sales comparisons get considerably easier in the second quarter since last year they reported retail comps up 2.6% and catalog sales up 5.4%.

PROMOTIONS/MERCHANDISE CHANGES. The "Taste of Asia" promotion in Williams-Sonoma stores was terrific and now they are into a Father's Day theme featuring outdoor entertaining with barbecue and a new margarita mix that is flying out of the stores. In Pottery Barn, the new colors have generated a lot of interest and strong increases (30-40% comps) in associated parts of the business like pillows that feature the new color palettes. They are enjoying good sell-through. Considering the time of the year and how late they are into the Spring season and into early Summer, there are very few markdowns and that has enabled them to have very strong margins. They will clear the color palettes in the June/July timeframe in preparation for the August launch of Fall. Traffic and average ticket prices have been very good in all divisions.

OUTLOOK ON COMPS/SALES PERFORMANCE. So far in the first couple weeks of the second quarter, all of the businesses are positive. They expect they will run positive comps from here on out. They have a lot of exciting merchandise initiatives moving into the Fall and Holiday season. They think people will especially notice initiatives to improve quality and the aesthetic and design of the goods in the Pottery Barn division both in the catalog and in the stores. They think Williams-Sonoma has many exciting initiatives for the balance of the year and they feel very confident about the comps going forward. They think it will build as they get into the year, so are more conservative about the second quarter and then more optimistic about the third and fourth quarters.

MARGINS. Merchandise margins continue to improve and were up 340 basis points in the quarter, offset by negative occupancy of 40 basis points, for a total margin up 300 basis points from last year. Obviously this quarter is the real big margin story, but they feel confident that they have margin improvement opportunity as they move forward throughout the year, although not as significant as the first quarter. They expect to be cash-flow positive for the year. They fully expect to fund this year's expansion and next out of internal cash generation.

SG&A EXPENSES. They are also satisfied to see that their SG&A was down from 36.3% to 35.9% of sales. This represents the fifth consecutive quarter where they have had lower SG&A on a year-over-year basis. This quarter's reduction was driven primarily by reduced advertising expenses. In part their advertising costs are favorable because of lower paper prices. They have a very good long-term agreement with their paper suppliers that is based on trailing prices so they don't see paper prices, even if their is an increase, affecting them much at all this year. They are forecasting favorable advertising costs for the rest of the year and think that the catalogs will continue to drive store sales for the rest of the year. They are increasing circulations in the store areas. They also have a very exciting third and fourth quarter ad campaign planned for the Pottery Barn business outside of the catalogs in quite a few national publications that will coincide with their launch of Fall and Holiday season goods.

INTEREST EXPENSE & EXPENSE LEVERAGE. Interest expense totalled $774,000, down from $1.54 million last year and this largely reflects the improved cash position that they began the quarter with and continued to enjoy at the end of the quarter. They expect interest expense to stay flat to last year at approximately $5 million. They have been working hard on generating positive expense leverage and fully expect to continue that each quarter. In terms of exact numbers, they think certainly on low single-digit retail comps and high single-digit/low double-digit catalog sales increases they can generate favorable leverage.

NEW OPENINGS AND STORE COUNTS. During the first quarter they opened two Williams-Sonoma stores and closed one. They opened four Pottery Barn stores and closed one. Their total company store count is 260, up from 256. On a square footage basis, year-over-year, square footage is up 23%. Williams-Sonoma is up 7% and Pottery Barn is up 45%. At the end of the quarter, they have 58 Williams-Sonoma stores in the large "Grand Cuisine" format and 37 of their Pottery Barn stores are in the large format. Right now they plan to end the year with 159 Williams-Sonoma stores, 77 of which will be in the large store format. They expect to end the year with 88 Pottery Barn stores, 52 of which will be in the large store format. That is a 22% square footage increase for the company for the year with a 278 total store count. They have 1 Hold Everything prototype test store being opened this Fall. They have other situations where they have moved a Pottery Barn store and will transition it to a Hold Everything. Their plans for 1998 are for 20-23% square footage growth -- probably 10-12% growth on the Williams-Sonoma side and 30-35% on the Pottery Barn side.

INVENTORY. Inventories at quarter end were $128.9 million, up 14% from $113.4 million last year. Retail inventories, however, on a square footage basis are actually down 12% from a year ago. All in all, they are pleased with their inventory levels at this point and they re-emphasized the company's commitment to strong inventory management and a continuation of the corresponding margin improvement.

MAIL ORDER OUTLOOK. During the first quarter they mailed 34.8 million catalogs against 33 million last year. They have increased their catalog circulation about 5% this year in the first quarter and are looking to increase that slightly in the second quarter, probably in the neighborhood of 5-10% for the rest of the year. Their sales this year are expected to go up about 15% and they are very comfortable with that.

SUMMARY. All in all they had solid sales performance, especially given the highly promotional volume last year. They made further progress in their margin rate reflecting both strong inventory management as well as a commitment to better margins. They achieved the fifth consecutive quarter of lower year-over-year SG&A and this is critical to their long-term goal of superior operating margin performance. And it was a strong start to fiscal 1997, a year where they are committed to further progress toward their goal of becoming a high-performance specialty retailer. They expect analyst estimates for the second quarter which currently stand at around $0.03 per share will go up and that full year estimates will probably also go up, given the performance in the first quarter. They are comfortable with estimates of $1.25 per share for the full year at this point.

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